Spain to Cut Net Debt Issuance in 2013, Rejects Bailout Now
Spain plans to sell 59 billion euros ($77 billion) of bonds after maturities in 2013 to finance the euro-region’s second-largest budget deficit.
Net bond issuance for this year compares with net sales of 62.7 billion euros last year and an initial target of 35.8 billion euros for 2012, Spain’s Treasury chief, Inigo Fernandez de Mesa, told reporters in Madrid today. Gross issuance will reach 215 billion euros to 230 billion euros and include 23 billion euros in financing for Spain’s regions, he said. That compares with 249.6 billion euros in gross issuance last year, he said.
“Spain’s debt is sustainable,” said Fernandez de Mesa, adding a bailout isn’t necessary for now as the government expects borrowing costs to fall again this year. They dropped to an average of 3.42 percent in 2012 from 3.9 percent a year earlier. The Treasury expects to maintain the average life of outstanding debt in 2013 at 6.06 years, he said.
Spain holds its first debt sale of 2013 on Jan. 10 as it girds for 159.2 billion euros of redemptions this year. Prime Minister Mariano Rajoy’s one-year-old government is trying to avoid requesting aid from Europe’s rescue fund and the European Central Bank to lower its borrowing costs.
“At some point, it is likely that the supply will tip the balance, cause yields to rise and force Spain to request aid,” Justin Knight, a London-based European rates strategist at UBS AG, said in a telephone interview. “There simply aren’t enough buyers,” he said, noting that the Treasury’s plan presented today increases gross bond issuance by 44 percent compared to the government’s September estimate in the 2013 budget plan.
Rajoy has pledged to trim Spain’s budget gap, which the European Commission put at 8 percent of output in 2012, to 4.5 percent of GDP this year. Fernandez de Mesa said Spain’s fiscal goals are discussed by the Commission and the government and the effort to be made would take into account the country’s deepening recession.
The Organization for Economic Cooperation and Development predicts the Spanish economy will contract 1.4 percent this year after shrinking 1.3 percent last year, according to forecasts published on Nov. 27. It expects Europe’s fourth-largest economy to grow 0.5 percent in 2014.
“The plans as they stand should not be seen as set in stone,” London-based strategists for Barclays Plc including Laurent Fransolet and Huw Worthington wrote in an e-mailed note. “A flexible approach to financing will likely be adopted by the Spanish Treasury again with privatization proceeds, private placements and other sources of funding.”
The Treasury plans to have net bill sales of 12 billion euros this year after reducing its stock of bills by 5.6 billion euros in 2012. It will introduce a new, nine-month bill, while dropping its 18-month note, Fernandez de Mesa said.
The Treasury’s current liquidity position is “comfortable” as the daily cash balance averaged around 35 billion euros in 2012, 5 billion euros more than in 2011, he said.
The yield on Spain’s 10-year benchmark bond fell 4 basis points to 5.07 percent at 3:57 p.m. in Madrid, while the spread with similar German maturities widened to 359 basis points. That compares with a euro-era high of 7.75 percent on July 25, before ECB President Mario Draghi pledged to save the euro with a bond purchase program known as OMT.
The “anemic growth outlook for 2013 is a big hurdle and makes it likely that Spain may have to request activation of the OMT,” said Fadi Zaher, head of fixed-income sales and trading for Barclays Wealth and Investment Management in London. “Concerns about debt sustainability won’t vanish overnight.”
Spain is rated one level above junk by Standard and Poor’s and Moody’s Investors Service, and two levels higher by Fitch Ratings.
The Treasury, which plans to sell as much as 5 billion euros in bonds maturing in 2015, 2018 and 2026 on Jan. 10, estimated that the total debt stock would reach 759.7 billion euros at the end of 2013, compared with 688.2 billion euros at the end of 2012.
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